The US stock markets are still feeling jittery this week, although we are seeing some stabilization in the International Markets, something that rarely gets headline coverage here in the US. The media bathes us in fear inducing coverage when we experience negative returns, but let’s step back from that a bit and think about what is really happening when markets turn downwards.
If people are selling, who are they selling to? There must be a buyer on the other side of the sale, or it would not be a recorded transaction at all. What has to take place in order for the buyer and seller to come to an agreed upon price? They both have to decide they are receiving a fair value for the transaction. So, what is different? The only thing that can be different is their perspectives. They both believe they are receiving cash or the security for a fair price, they just believe the expected return of the security is different, or it could just mean the seller needs to raise cash to spend or to purchase a different security. In most cases, what it doesn’t mean is the security is irrevocably impaired.
Let’s continue discussing the US stock portion of our investment portfolios, and tackle the DFA US Large Cap Value Fund. In our typical 60% stock and 40% bond portfolios, this fund occupies between 8-9% of the total portfolio. “Value” stocks are stocks that have market prices that are relatively low to the value of the company’s assets. We would think of it as buying something on sale. In investment speak, we describe it as Price-to-Book (P/B) value. Let me show you a somewhat extreme example: The top holding in the DFA US Large Cap Value Fund is Exxon. Let’s compare Exxon’s P/B to Amazon, the very famous growth stock. “Growth” meaning that it has a very high P/B ratio. Both companies have growing revenues, so don’t get confused into thinking that growth only occurs with “growth” stocks.
Price-to-Book Ratio
Exxon Mobile 1.8
Amazon 24.9
So, investors in Exxon are willing to pay 1.8 times what the company could be liquidated for, whereas Amazon investors are willing to pay $24.9 for every potential dollar they could get from a liquidation of Amazon.
What happens in the long run, is that because we are paying lower prices for “value” stocks, we actually end up with higher returns. In fact, since 1928, value stocks have had 3.54% higher returns per year than growth stocks! Why don’t we only own value stocks, then?? Well, as with all investing, sometimes getting the maximum returns take time and patience. Value stocks do not outperform growth stocks every year, and at times growth stocks can be better performers over several years. What we want to do is to own growth stocks, but layer on some extra value stocks to capture those long term returns. DFA US Core Equity 1, has value and growth stocks. We add a large company value emphasis by owning DFA US Large Cap Value as part of a portfolio. The outperformance of value holds true for all markets and all sizes of stocks, and we will tackle more of how we capture the “value premium” as we discuss more funds. For now, I will show you more about the actual fund.
The fund currently holds 326 stocks. The top 10 holdings are:
Exxon Mobile Corp 3.88%
AT&T Inc 3.79%
Pfizer Inc 3.65%
Intel Corp 3.51%
Wells Fargo & Co 3.06%
Comcast Corp 2.48%
JP Morgan Chase & Co 2.43%
Chevron Corp 2.34%
Bank of America Corp 2.21%
Berkshire Hathaway Inc 1.99%
There are some holdings that overlap with DFA US Core Equity 1, notably JP Morgan Chase and Berkshire Hathaway, but the composition of the holdings are quite different. Remember of the emphasis on technology in Core Equity 1? There is a very different emphasis here:
Current Sector Allocation:
Financials 22.66%
Health Care 16.77%
Energy 15.18%
Information Technology 11.82%
Consumer Discretionary 10.95%
Industrials 8.82%
Consumer Staples 4.78%
Telecommunication Services 4.48%
Materials 4.26%
Utilities 0.27%
We hold DFA US Large Cap Value in order to capture more of the “value premium” and also to add diversification through emphasizing companies in the financial, health care and energy sectors.
Next week, we will talk about DFA US Targeted Value!
